Financial Professionals


Major Currency Markets



Remember the Dubai debt crisis? I believe that, by now, most of us have forgotten about the Thanksgiving 2009 event that was predicted to roil the markets. The capital markets did indeed survive that news. However, a lingering currency shift remains from that event. In essence, the U.S. dollar established a cyclical low after a significant decline from the March 2009 Armageddon high. Fueled by unprecedented Federal Reserve easing measures, the dollar trended lower throughout much of 2009. As the dollar declined, the global capital markets rebounded on the reflation trade.

The reflation trade ended with the November dollar bottom (Fig 1-below). Although the capital markets continued to move higher as we entered 2010, a shift toward "junk" was the favored trade. Reflation themes lagged the consumer discretionary-oriented V shaped economic recovery trades. The dollar began to appreciate. Euro zone liquidity fears accelerated the appreciation much higher in Q2 2010.

It will be critical for investors to gauge the currency market movements over the next few months. I believe the currency markets will telegraph the direction of the capital markets accordingly. Personally, I will applaud a sideways, consolidating U.S. dollar. What I fear is a resumption of the aggressively upward momentum.

Fundamental odds favor a sideways-to-lower dollar over the next few months. The U.S. continues to debate whether the slowing economic data is a soft patch or the beginning of a double dip recession. Either way, weakening economic data will soften the value of the dollar. Also, the U.S. Federal Reserve will reintroduce quantitative easing measures, if necessary. They certainly will reintroduce them much faster than the other G3 central banks.

Seasonally, September, October, and November are the weakest months for the dollar, historically. The other side of that data is that the price of gold could elevate well above this year's June high @ 1264.80. As we head into the middle of August, "The Street" is anticipating, and odds favor, a similar rise in the price of gold as we witnessed last year (Fig 2-below).

This past week's widest trade deficit figure (Fig 3-below) in 18 months - $42.3bn - does not suggest any meaningful contribution to U.S. GDP growth from exports. President Obama has expressed his desire to double exports within five years. With slowing housing, the inventory boost fading, and stagnant unemployment, we must have better trade data. Until we achieve a better trade balance, better economic numbers odds favor a weakening U.S. currency.

The July 23rd European bank stress test will play an important role in the global currency markets during the 2H of 2010. The ECB does not want to enact U.S. style quantitative easing. What they do want to borrow from us is the investor confidence boost that the May 2009 stress tests on U.S. banks provided. Speculative shorts being unwound over the past few weeks let us hope that the European bank stress test results keep the euro in a trading range or that it continues to move higher, forcing shorts out of the market. The most undesirable outcome is a return to the precipitous decline we witnessed in Q2 2010 (Fig 4-below).

The Most Favored Currencies are:

Australian dollar - If you believe the softening China data is a "tap on the brakes" versus "slamming," then favor ownership of the Ausie. I am in the "tap on the brakes" camp.

Canadian dollar - besides my love for hockey, I favor most of the Canadian capital market themes over the those of the U.S. Whether it is financial institutions, the broad market index, or currencies, Canada prevails. The Bank of Canada can keep raising rates. Enough said. By the way, they have some great natural resource reserves.

British pound - I remain a fan. The UK economy is healing faster than the U.S. They are one step ahead of us. Retail sales are strong and unemployment is recovering faster. In addition, in a fight against deflation, some scent of inflation is desired; the UK has a whiff of that inflation scent.

Finally if you believe in oil, you believe in higher currency values for Russia and Brazil.




US DOLLAR JULY 20, 2007 - JULY 16, 2010 (Fig.1)





Source: Bloomberg

SPOT GOLD JANUARY 20, 2009 - JULY 16, 2010 (Fig.2)





Source: Bloomberg

US TRADE BALANCE SEPTEMBER 30, 2008 - MAY 31, 2010 (Fig.3)






Source: Bloomberg

SPOT EURO CURRENCY JULY 20, 2009 - JULY 16, 2010 (Fig. 4)

Source: Bloomberg


Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.